NextFin News - Goldman Sachs has scrapped its forecast for a Federal Reserve interest-rate cut in 2026, marking a significant pivot in the bank’s outlook following a surprisingly resilient U.S. labor market report. In a note to clients on Sunday, economists led by Jan Hatzius shifted their baseline expectation to a "higher-for-longer" scenario, projecting that the federal funds rate will remain at its current range of 4.25% to 4.50% through the end of the year. The revision follows Friday’s Bureau of Labor Statistics data showing the U.S. economy added 172,000 jobs in May, more than double the consensus forecast of 85,000, while the unemployment rate held steady at 4.3%.
Hatzius, the Chief Economist at Goldman Sachs, is widely regarded as one of the more optimistic voices on Wall Street regarding the "soft landing" narrative. Historically, his team has leaned toward a "dovish" bias, often predicting that inflation would cool without requiring a severe recession. By abandoning the call for a 2026 rate cut, Hatzius is effectively signaling that the U.S. economy’s structural strength—and the resulting inflationary pressure—is more stubborn than even the bank’s relatively sanguine models had anticipated. This shift is particularly notable given that Goldman had previously been among the more vocal proponents of a mid-year easing cycle.
The decision by Goldman Sachs does not yet represent a universal consensus among primary dealers, though the tide is clearly turning. While some institutions, such as JPMorgan Chase, have also pushed back their easing timelines, others maintain that a cooling trend in consumer spending will eventually force the Fed’s hand before December. The current market sentiment, as reflected in fed funds futures, shows the odds of a rate cut at the upcoming June meeting have plummeted to near 1%. This represents a total collapse in easing expectations compared to the start of the year, when traders were pricing in at least two 25-basis-point reductions for 2026.
The policy path is further complicated by the leadership of U.S. Federal Reserve Chair Kevin Warsh, who took office under U.S. President Trump in early 2025. Warsh has faced immediate tests from a labor market that refuses to buckle despite the highest interest rates in two decades. According to CNBC, several central bank officials have recently challenged the core policy assumptions held by Warsh, suggesting internal friction over how to balance the dual mandate of price stability and maximum employment. The May jobs report has effectively "swept aside" the possibility of near-term cuts, leaving the Fed in a holding pattern that risks over-tightening if the lag effects of previous hikes finally hit the economy.
The primary risk to Goldman’s new "no-cut" thesis lies in the potential for a sudden "air pocket" in the labor market. While the headline 172,000 job gain was robust, some analysts point to the 4.3% unemployment rate—up from the lows of 2023—as a sign that the cushion is thinning. If subsequent data shows a sharp rise in initial jobless claims or a significant drop in job openings, the Fed could be forced into an emergency pivot. Furthermore, the ongoing geopolitical tensions in the Middle East continue to act as a wild card for energy prices, which could either fuel inflation or, if they lead to a global slowdown, provide the deflationary impulse needed to justify lower rates. For now, however, the burden of proof has shifted entirely to those still calling for a pivot.
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